From a thousand to three - Russia's slash in arbitral institutions‎

31.10.2017

On 1 November, the number of arbitral institutions allowed to administer international commercial arbitrations in Russia is set to be slashed from thousands ‎to just three. What will this mean for the jurisdiction?

On that date – just two days from now - the transition period for the reform of Russian permanent arbitral institutions permitted under the new Russian legislation, which entered into force on 1 September 2016, expires. Russian institutions which failed to obtain a special Russian government permit will no longer be permitted to operate, ‎ explainsAlexey Yadykinof Freshfields Bruckhaus Deringer in Moscow in a note shared with GAR ahead of circulation to clients. That note forms the basis of this article.

The institutions have had a year to apply for the permits in line with filing rules introduced on 1 November ‎2016. The International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC) - Russia's most famous commercial arbitration institution - was exempt but was required to reform its rules. So too was the Maritime Arbitration Commission at the Chamber of Commerce and Industry (MAC), Russia’s well-established institution for maritime dispute arbitration.

According to public information, dozens of institutions have applied for permits but to date only two have obtained them - the Arbitration Centre at the Institute of Modern Arbitration and the Arbitration Centre at the Russian Union of Industrialists and Entrepreneurs.

The application of the Russian Arbitration Association, which was created by the leading firms in the Russian legal market to promote arbitration and establish a new efficient centre for commercial arbitration in Russia, was rejected on technical grounds.

For now, this gives commercial parties just three Russian institutions to choose from for commercial (other than maritime) and corporate disputes. This is in stark contrast to before the reform, when, according to some estimates, the number of permanent arbitral institutions in Russia was in excess of 1,000, and perhaps much higher. Many of these were so-called pocket arbitration institutions of doubtful independence in respect to their disputes. It was in part to eliminate the scourge of “pocket institutions” that the new legislation was introduced.

The 1 November is not an absolute cut-off date for applications. New permits may be issued afterwards, including to institutions whose applications have previously been refused. Yadykin is hopeful for example that a fresh application by the Russian Arbitration Association will be accepted.

However, as Yadykin says, "it is reasonable to assume that the very conservative approach to issuing new permits will continue and that the number of permanent arbitral institutions in Russia will remain low."

The new legislation does not require that permits be obtained by foreign arbitral institutions, he notes. However it does stipulate that, unless they do (with less onerous criteria to meet than the domestic institutions), they will not be considered permanent arbitral institutions for Russian arbitration law purposes. The arbitrations administered by them will be deemed ad hoc arbitration under Russian law.

‎Given that the new legislation allows only institutional arbitration of corporate disputes under Russian law, not having a permit will also disqualify foreign institutions from administering Russian corporate disputes.

In practice, Yadykin says, many parties will continue submitting Russian corporate disputes to "non permitted" foreign institutions. "However, they need to be mindful of the legal risks - first and foremost, the risk of non-enforcement of their arbitral award in Russia."

According to public information, some foreign institutions plan to apply for the Russian permit [GAR has reported that the Kuala Lumpur Regional Centre for International Arbitration and Vienna International Arbitration Centre are among them]. However, aside from one Kazakh institution, whose application was refused, none currently have.

The LCIA, one of the most famous administrators of Russia-related arbitrations, has not indicated plans to apply.

Yadykin notes that institutional arbitration is not the only option in Russia. The new arbitral legislation does not prohibit ad hoc arbitrations - except in relation to corporate disputes. "However, if the parties intend to appoint a body or institution to assist in ad hoc arbitration, for example to resolve deadlocked appointments and challenges, the body or institution must hold a permit."

New rules

Since last year, ICAC and the MAC, as well as other Russian arbitral institutions, have reformed their arbitration rules to bring them into compliance with the new law. They have also modernised the rules generally - ICAC in particular has introduced a number of new provisions reflective of modern global trends, Yadykin says.

Among the most significant changes are the new rules introduced to comply with ‎new regulation for arbitration of corporate disputes (connected with the incorporation and management of, and participation in, Russian companies). ‎ This has been one of the pillars of the country's arbitration reform.

The new legislation sets our minimum statutory requirements for some types of disputes (such as disputes concerning title to shares and participation interests in Russian companies), which allow them to be arbitrated under regular, non-specialised rules.

However‎, for the vast majority of corporate disputes, arbitration is only permitted under specialised "corporate dispute arbitration rules", which set out methods for informing the target Russian entity and its shareholders of the dispute and for joining additional participants, along with procedural requirements.

Such specialised corporate arbitration rules have already been adopted by ICAC, the Arbitration Centre at the Institute of Modern Arbitration and the Arbitration Centre at the Russian Union of Industrialists and Entrepreneurs. ‎ICAC has made them standalone rules that apply alongside its regular rules for domestic and international arbitration, while the other two have incoporated them into their regular rules.

The Russian Arbitration Association has also adopted specialised corporate arbitration rules, but it cannot administer arbitrations under such rules (or at all) until it obtains the permit.

But submission of corporate disputes to institutions with these special rules may be insufficient for them to be arbitrable. For most such disputes, other requirements exist such as accession of the target company and all its participants to the arbitration agreement.

These may be difficult to comply with - for example, for joint stock companies with large numbers of shareholders - thus limiting the scope of corporate arbitration in Russia.

Complex and "cascade" arbitration clauses

The new legislation gives parties wide discretion to fine-tune their model arbitration clauses, for example by including “direct” (specific) agreement to waive recourse to state courts on matters such as resolution of deadlocked appointments and challenges or to seek set aside of awards.

This is likely to result in complex clauses, Yadykin says - especially bearing in mind the opportunity to opt out of default provisions that often exist in arbitral rules.

Yadykin also explains that in the context of corporate and financial transactions with a foreign element, there has been significant increase in the use of "cascade" arbitration clauses for corporate disputes. Through these, parties agree in advance on a list of preferred arbitral institutions (including non-Russian ones) and agree that any future dispute shall be submitted to the highest-ranked institution on the list, provided it has obtained the Russian permit before the commencement of the arbitration proceedings.

Outstanding issues

A uniform approach to interpretation of the new legislation, especially with regard to corporate disputes, is still to be reached. For example, there are different views on whether any disputes whatsoever arising under share and participation interest purchase agreements in Russian companies (including disputes over the purchase price payment, warranties and representations), or only disputes relating to title to shares and interests, will be deemed corporate.

There are also differing interpretations of "simple" corporate disputes and those requiring specialised corporate dispute arbitration rules, as well as "corporate" and "non-corporate" disputes over cross-border transactions.

An important step towards a harmonised interpretation came in August this year, when the Russian Arbitration Association published a comprehensive commentary on the new legislation with active participation from a number of firms including Freshfields lawyers. This is currently only available in Russian but it is planned it will be translated into E‎nglish in due course.

What now?

As Yadykin writes in his client brief, the legal infrastructure necessary for implementing the new legislation is now complete. There remain open issues, and the market looks towards development of court practice in relation to the new law and rules, including the corporate dispute arbitration rules. One also expects a gradual increase in arbitral institutions holding the permit despite the highly technical and inquisitorial nature of the review process.

"Arguably the most significant developments would be the issuance of such permits to the RAA [Russian Arbitration Association] and reputable foreign arbitral institutions," he says.